Canada's Inflation Holds Steady at 3%, RBC Sees No Rate Hikes Through 2026

Canada's inflation rate has stabilized at 3% year-over-year in August, according to Abbey Xu, an economist at Royal Bank of Canada (RBC). This marks no change from July's reading. The core measures, such as the Consumer Price Index (CPI) excluding food and energy and the Bank of Canada's CPI-trim and CPI-median, remain near the 2% target.

Xu notes that while food and energy components are still elevated, they are easing somewhat. He emphasizes that there is limited evidence of significant second-round inflation from elevated energy costs. However, he warns that persistent oil strength could tilt the risk towards earlier tightening by the Bank of Canada.

The RBC economist argues that this supports their base case that the Bank of Canada will keep rates unchanged through 2026 before gradual hikes in 2027 as the economy strengthens. He highlights the importance of underlying price pressures and the persistence of oil prices in determining the inflation outlook.